Low ECB rates are justified, and not sole reason for weak bank profits - Villeroy

Credit: REUTERS/TORU HANAI

Low interest rates are justified by the euro zone's current economic conditions and their impact on banks' profitability should not be exaggerated, ECB policymaker Francois Villeroy de Galhau said on Tuesday.

By Leigh Thomas

PARIS, May 28 (Reuters) - Low interest rates are justified by the euro zone's current economic conditions and their impact on banks' profitability should not be exaggerated, ECB policymaker Francois Villeroy de Galhau said on Tuesday.

The European Central Bank has said it is considering the need to mitigate the impact of its negative deposit rate on lenders' profits.

With a negative deposit rate, banks have to pay to park cash at the ECB, which they say hurts their profitability the longer the central bank keeps rates at current record lows.

"Maintaining a low interest rate environment is completely justified and necessary in light of the economic situation in the euro area," Villeroy said at the Bank of France, where he is also governor.

Speaking in his role as the head of France's ACPR financial supervisor, Villeroy said the issue of low rates' impact on banks should neither be ignored nor blown out of proportion.

"It would be an exaggeration ... to say this is the only reason profits are under pressure: monetary policy also has favourable effects for banks, including a reduction of the cost of risk and an increase in lending volumes," Villeroy said.

Other than low rates, banks - as well as insurers - were facing an "existential challenge" in the form of transforming their businesses to interact with clients digitally while investment banks were losing market share to U.S. rivals due to a lack of critical mass, added Villeroy.

With profits squeezed by those factors, he urged banks to put into place restructuring strategies focused on technological innovation, cost control and diversification of revenue sources.

He also renewed a call for more consolidation in the European banking sector, which he said would make lenders more efficient and allow them to compete better internationally.

"Private sector actors do not need to wait for public authorities to do everything before starting to think about consolidation strategies," Villeroy added.

(Reporting by Leigh Thomas; Editing by Sudip Kar-Gupta)

((leigh.thomas@thomsonreuters.com; +33 1 4949 5143;))

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